Suezmax Tanker Market: Undergeing Profound Change

The Suezmax market is undergoing a profound realignment: major independent shipowners, such as Bergesen d.y., C.Y. Tung and Sanko S.S. have exited the Suezmax market over the course of the last decade. Many others, including four of the six oil majors (Exxon, Mobil, Shell and Texaco), and independents Worldwide Shipping, Troodos and Novorossiysk Shipping have reduced their presence substantially In contrast, only three companies have clearly expanded their market presence — Chevron, Fred Olsen and OMI Corp. (which has sought ties with chartering interests) — and yet, according to Drewry Shipping Consultants' latest report, entitled Suezmax Tankers: Myths, Facts and Surprises, the S&P market registered 120 sales from 1990-95 and a fleet of around 370 ships. Drewry's analysis found that almost half of these sales were to Greek principals, such as Agency Trust and Thenamaris, mainly targeting tonnage in the 15 to 20- year-old age group. The S&P market has also seen a sharp rise in interest in early 1996, with Dynacom a featured buyer. A closer examination of some acquisitions shows that many of these aging vessels have only just passed special survey, leaving them well placed to take advantage of any improvement in the market.

Although it can be argued that Suezmax tonnage is becoming marginalized in terms of its trading options, this segment cannot be isolated from the fortunes of the tanker market as a whole. In this respect, Drewry forecasts that freight rates for Suezmax tankers will build on the strength of the first six months of 1996, reaching a cyclical peak around the end of the decade with time charter equivalent earnings of $25,000.

Drewry's detailed forecast freight rates to 2005 show the returns from spot market trading before capital costs may average around 10 percent, but the return on equity from newbuildings and modern tonnage will barely be positive, estimated at one to two percent. This still needs to be placed in context — average freight rates for the period 1991- 95 implied returns of minus one percent to plus one percent. All this serves to suggest that once again asset players will win the day, gaining steady returns from trading and selling into market strength.

Clearly, the Suezmax tanker has neither the trading flexibility of an Aframax nor the economies of scale of the VLCC, and yet it is subject to compliance with OPA 90 for much of its trade. Triumphed in the 1980s as the largest vessel able to transit the Suez Canal fully laden, the 1990s have seen cargo movements of this type plummet sharply. A dearth of time charter interest in medium or longterm fixtures leaves most owners at the mercy of the spot market. Only a handful of vessels, such as those operated by Chevron, are used to their full potential in dedicated trades.

The spot market itself has become increasingly focused on three main trading arenas: the Atlantic; the Mediterranean; and Asia/Pacific. The first is heavily influenced by the vetting requirements of the key charterers, which is evident in the age of vessels reported fixed. And it is clear that OPA 90 is continually marginalizing more (aging) tonnage in non- U.S. trades; owners of double hulled vessels are clearly favored. Through the late 1980s, VLCCs increasingly dominated the Middle East trades and many ULCCs shuttled to the Sumed pipeline causing oil movements through Suez to fall. However, the continued growth in oil output from West Africa allowed Suezmax tankers to find a new home. However, the mid-1990s have brought about a new threat for the key West African trades — a renewed influx of VLCCs — partly as a result of weak freight rates, but also as cargo parcels are doubled up. History shows that during the early 1980s, VLCCs were heavily engaged in West African trades. It may be no coincidence that the fleet of around 370 vessels is at its lowest point since the mid-1980s.

Almost 60 percent of the fleet is more than 15 years old, and about 100 fifth special surveys are due between 1996 and 2000, and almost 40 fourth special surveys are scheduled for 1996. More decline in fleet size seems inevitable.

Drewry's report presents a comprehensive review of the main factors at work in the market today. It profiles in detail seaborne crude oil trades and Suezmax trading patterns, and examines the costs and revenues from operating this type of tonnage. Fleet development of the past decade is examined, and all Suezmax owners and charterers are reviewed on a statistical basis.

The preceding was excerpted from a report produced by Drewy Shipping Consultants.

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